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Monthly Archives: October 2008

I have followed the US election campaign with some interest, since the outcome will have worldwide implications.

Unfortunately I am not able to comment on the 30 minute Obama ad because it appears to be hosted only on YouTube. Access to YouTube is censored in Turkey.

If anyone knows of an another source for the ad, or a download, it would be much appreciated.

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A personal view from Turkey by a Brit who lives there.

 

It makes me so angry when I see countless financial pundits on television warning the US public that unless they agree with the Seven Hundred Thousand Million dollar bailout of the financial system there will be mass unemployment, and companies stifled by lack of credit.

 

Have these pundits completely forgotten where all the money lent as credit comes from in the first place? Alternatively, are they so embroiled in the system that feeds them so diligently they’ve never really thought about it?

 

If all the people the pundits were talking to stopped building, growing and making things there would eventually be no money in the system. If the financial institutions of the world want to maintain their lifestyles, they have to look after the people who create all the real wealth very well indeed. The financial institutions, by allowing a situation to develop whereby the wealth creators became aware that they are at their mercy was definitely not a good move.

 

I can’t believe how so many people, wealth producers as well as wealth manipulators, are duped into believing that modern society cannot function without credit.

 

Credit is an invention of the banks; the money they lend created out of nothing by siphoning off the real wealth from those who create it. No mystery here, all the things we judge our wealth by, buildings, cars, the very clothes we wear, in fact everything made by man, was made by a relatively small number of people, supported only by designers, distributors and retailers, not by financial institutions. See my cartoon.

 

In fact, there should be little if no requirement in a just society for any credit at all.

 

Whoa!, don’t all shout at once, did I hear someone shout ‘naïve’, ‘the world economy would collapse without credit, people would starve, companies would not be able to operate’, blah, blah, blah.

 

However, as long as there is a vast army of people in the financial industry supported by so few, I agree a credit society is necessary. (I use the word ‘industry’ here with tongue placed firmly in cheek)

 

Yes, of course, the world economy would collapse, the incumbent credit system took the banks hundreds of years to install, it would take many years of reform for it to be reorganized into the socially benevolent financial system it should be.

 

For the past 15 years, I have lived in Turkey. When I came here mortgages and credit cards were virtually non-existent, and surprise-surprise almost everyone lives very well in their own, paid for homes.

 

It’s with a sad heart that I have observed during the last few years the creeping cancer of bank driven credit spread its tentative tendrils into the Turkish economy. Homegrown banks are learning the fundamentals of ‘stealthy wealth extraction’ from their foreign cousins as well as an influx of foreign banks that see Turkey as a piece of prime meat, ripe for infection.

 

Of course, creating a credit reliant society is not something that can be done overnight, first the banks have to issue credit cards indiscriminately, offer larger and larger loans over ever extending periods of time and initiate systems that inject money into the financial system not backed by real wealth.

 

Gradually, in time, the intrinsic cost of everything will rise. Credit driven inflation (not to be confused with the day-to-day inflation percentage bandied about by governments), is the ‘built in’ inflation that is part of the cost of everything, this only evolves after many years of careful nurturing by the banks. Once installed it becomes almost impossible for most people to buy anything without resorting to credit.

 

Fortunately, Turkey is still in its infancy when it comes to being a credit driven society, though it’s obvious from observation today that the foundation stone for a future Turkish credit society has been laid, its eventual arrival is inevitable.

 

In the meantime, despite financial turmoil in many other countries, Turkey is still able to say, what credit crunch?

In the light of the current world financial crisis, my first blog on WordPress has to be my personal view of the so-called ‘Credit Crunch’, ‘Credit Quake’ or more correctly, ‘Credit Scam’.

 

For some time I have been unhappy with the rise and rise of the credit society. The financiers would say the current situation came about because of the inability of an inordinate number of ordinary Americans to pay their mortgages. No doubt, that may be true.

 

However, this and a number of other financial crises are the inevitable consequence of a system built upon a bit of financial chicanery that should in my opinion, be considered fraudulent.

 

The problem is that the financial system that exists today has been around for so long most people consider it normal and take it for granted.

 

What I am about to suggest may seem outlandish, and if I were criticizing some religion or other I would be called a heretic. Nevertheless, in order to begin to understand how a financial crisis of the magnitude that currently exists could come about, it’s necessary to take quite a few steps back in order to see the bigger picture.

 

On the way to taking those few steps back, I would just mention that it should not be necessary for most ordinary people to incur so much debt. The cost of raw materials, labor, distribution and retailing are not so great as to justify the inordinately high price of everything.

 

I will keep this as brief and as simple as possible. I know I run the risk of being accused of oversimplification, but I want this message to be understood by as large a percentage of the population as possible. In particular, to those duped into accepting a financial system that, unlike the fabled Robin Hood, steals from the poor and gives to the rich. I am not being condescending and I don’t purport to understand myself many of the financial mechanisms that are in place to divert the real wealth from the people into the hands of the financial institutions.

 

However, one mechanism is fundamental to the wealth extraction process and that is ‘fractional reserve banking’. Three innocent enough words in themselves, but together, dynamite in the hands of the bankers.

 

And this is how it works:

  1. A bank borrows money from the public or companies, places it in its vault for safe keeping and promises to return the money on request.
  2. The bank pays the depositor interest on the amount held on deposit.
  3. The bank then lends the money it has on deposit to the public or companies at a higher rate of interest. The difference is the banks profit.

 

OK up until now you might say, though even this practice (known as usury) was illegal in times gone by.

 

This is where things start to go a little astray.

  1. When the bank gets a borrower to sign a pledge to repay the amount borrowed plus interest the bank uses the debt agreement to lend further amounts, up to 10 times or more the value of the original loan, to the public or companies.
  2. The bank now receives interest not only from the original loan but also from the additional loans financed by money created out of thin air thus earning the banks a profit 10 times larger than that received from the original loan. And so on.

 

The net effect of all this over a period of hundreds of years is to maintain all products at artificially high price levels in order to perpetuate the credit society.

 

Now we’ll take another step back to a time when bartering was the way people went about their business. In order to survive you had to make or produce something that other people wanted. If bankers had existed at this time, either they would have been beggars or they would have starved.

 

The point I’m making is that the ‘banker types’ in society had to create a system whereby they could survive in a world where they produced absolutely nothing. I’m sorry to beleaguer the bankers, but they started the whole sorry state of affairs, and my comments apply equally to all financial institutions.

 

As I mentioned before I’m not going to criticize the many mechanisms used by the financial institutions, mainly because I don’t know what they all are, it’s really only necessary to try and find the root cause of the perpetual financial crises.

 

All the real wealth created in the world comes only from the production of ‘things’, all the things we see around us that are manmade, all the things that everyone judges their wealth by. Money is not a measure of real wealth it’s just supposed to ‘represent’ the wealth that’s created. I say supposed, because the amount of money in circulation usually exceeds the amount of wealth created.

 

This is where it gets a little complicated, and I am not sure I fully understand it myself, but as far as I can deduce there are two fundamental types of inflation.

  1. The first is inflation that is immediate, that caused by too much paper and plastic money in the system and not enough goods, (one of many factors of course). This is the inflation percentage bandied about by Governments and quoted on financial television programs.
  2. The other is inherent or background inflation, this is inflation that has built up over centuries as a way of maintaining the price of all goods at higher than justified prices in order to underpin the need for a credit society.

 

In other words, to give just one example, there is absolutely no justification for the fact that Joe Bloggs the building worker has to sign up to 30 years of debt in order to buy a house he and no more than twelve of his colleagues built in 8 weeks. The price of materials is roughly equivalent to labor costs. The reason it takes 30 years for Joe to pay for his house is that as well as his family he has to help support the vast army of people in the financial institutions.

 

In follows in conclusion, that society is split broadly into two types of people.

  1. Those who produce real wealth and those people who support them such as designers, distributors, marketers, wholesalers, retailers etc.
  2. Those who divert the real wealth from the producers by a variety of sophisticated and complicated financial mechanisms and then continually manipulate it for their own profit and gain.

 

The financial institutions now have so much power that it’s very unlikely the system will change anytime soon. The recent ineptitude of Wall Street has highlighted just how highly strung and fragile the current system is. Modern technology allows stocks to be traded non-stop around the world minute by minute. Wealth extraction from the producers has never been so efficient, nor have there been so many people on the financial institution bandwagon.

 

It was obvious to anyone interested in macroeconomics that a collapse of the financial bubble was inevitable. What should ‘not be inevitable’ is the bailing out of the financial institutions when their possibly criminal actions cause such havoc and misery. The US Congress should not be discussing limits to chief executives ‘Golden Parachutes’ they should be discussing criminal penalties and drastic reform of the financial institutions.